On a public stock market that is the value that investors place
on future free cash flows of the business discounted to today's date to account for the time value of money.
Discounted Free Cash Flow (DCF): Analysis uses
future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment.
After we calculate the present value of
future free cash flows for all forecast periods, we make several adjustments to shareholder value to account for non-operating assets and liabilities that impact the amount of cash available to shareholders.
Well, capital - intensive companies have to re-invest a significant amount of earnings back into their businesses, thereby
reducing future free cash flow, and by extension, the PE multiple that investors are willing to pay for that earnings stream.
Nevertheless, this post is not focused on the absolute valuation and we'll discuss more in another post where you will require to understand a lot of complex terms
like future free cash flow projections, discount rate (weighted average cost of capital - WACC) etc to find the estimated present value.
Yes, the attractiveness, is somewhat limited by the risk that management could poorly
allocate future free cash flows, but, given the asset value, I see limited downside and I like investing alongside management where they have significant skin in the game.
What does matter is finding new products and processes that change the value of
the future free cash flow stream.
In the process, prices for risk assets get bid up relative to
their future free cash flows.
Basically all you need to do is estimate an investment's
future free cash flows and «discount» them to a present value estimate.